Primary Section

Time to buy iron ore miners?

The market seems to think so with everything flying today. RIO is up approaching 6%, BHP is up 4% and FMG is up 3%. RIO itself captures the spirit, from the AFR:

On Rio Tinto estimates, China’s domestic production could fall to about 230 million tonnes by December, a reduction of about 40 per cent from the 400 million-odd tonnes the country was pumping out at the start of 2014.

Rio iron ore boss Andrew Harding told Fairfax Media on Thursday that the miner was $US2 a tonne away from its “break-even” iron ore price-target for 2020 of $US35 ($45) a tonne, after reducing cash costs to a world-beating $US17 a tonne in the December quarter.

Mr Harding said he was now “considering the viability of the (2020) target”.

…Our strategy is to position our business,” he said. “What happens to other producers, well, that’s their business, not ours.”

As I’ve said recently, there is no way to know how far this bounce will run. Sentiment is loose and loving it.

What I can say is that unless you’re operating on very short time frames, the bearish case for iron ore, iron miners and RIO is totally unaffected by yesterday’s RIO result.

In my view, RIO has almost no chance of driving this much Chinese iron ore out of the market in the nominated time frame. It may get close to reducing China to 250mt over the next 3 years but even then, it is still far short of what is needed to curtail the huge oversupply in the market.

Iron ore prices will still have to fall far enough to rationalise all Australian and Brazilian junior supply and most if not all of FMG’s output as well.

That means prices well under $50 next year will be needed to balance the market (my guess is $45) and with RIO’s all-in costs now at $35 that means a profit of $3 billion for the iron ore division versus this year’s $8 billion. Even with the financial repression tailwind for shares, that is a profits demolition that cannot support the share price.

The iron ore miner investment beyond the short term remains dreadful, unless you’re kicking back and waiting for a chance to re-enter shorts.